MYR Surge; China Downgrade Brushed Aside; Treasuries Rallied

8 June 2017

Credit Market Monthly Review

May 2017

MYR Surge; China Downgrade Brushed Aside; Treasuries Rallied   

Market Review

¨   MYR Credit Market: MYR and MGS rallies to annual highs. The Malaysian bond market rallied in May with the TR BPAM All Bond Idx rallying 0.63% (vs KLCI Total Return: +0.52%), as the MGS curve continued to rally. Government bonds rallied a further 0.82% during the month as the MGS curve bull flattened following the rally the previous month as the 3y MGS fell +8bps MoM to 3.29% following the -32bps rally the previous month, while the 10y MGS saw yields fall -18bps to 3.87%. The 10y MGS levels breached the 4.0% for the first time in the year at the beginning of the month and has remained below the level since.

Corporate spreads widened further as MGS rallied. Corporate bond trading picked up to MYR8.7bn, though still weaker than the trading activity in 1Q 17. The quasi-government segment continued to underperform the corporate sector return of 0.44% for the month as the segment continued to see strong issuances and as the MGS market rallied further. After the strong widening of credit spreads last month, spreads increases of the AAA bond continues as the 5y and 10y segments rose +6bps and +13bps. AA bonds saw 5y spreads rise +8bps; May issuance raises annual supply; Inflows in Malaysia govvies foreign ownerships reverses 5-month selldown.

¨   APAC USD Credit Market: Markets risk aversion; The US administration was again in the centre of attention as President Trump’s alleged pressured former FBI Director James Comey to end investigations into his campaign’s ties with Russia which emerged after he was surprisingly removed from his position as director. UST 10y slipped 8bps MoM to 2.20%, whereas the 2y rose 2bp to 1.28% as June rate hike appears to be largely priced in. Primaries slowed to USD24.7bn; Busy month for rating actions; downgrades resurfaced in May lead by Chinese/HK linked credit downgrades.

Rating Trends

¨   Busy month for rating actions; downgrades resurfaced in May lead by Chinese/HK linked credit downgrades. Average upgrade/downgrade ratio of 0.47x in May against the 1.06x in April. Majority of the downgrades (33) were Chinese government related issuers downgraded following the Chinese sovereign rating downgraded by Moody’s to A1 from Aa3. Moody’s also took action on a list of Hong Kong companies following the cut of Hong Kong sovereign rating to Aa2 from Aa1 – MTR Corp Ltd, Kowloon-Canton Railway Corp and Hong Kong Mortgage Corp Ltd. Similarly, S&P slashed the ratings of 23 Australian financial institutions, driven by the greater economic risks particularly in the populous cities of Australia in Sydney and Melbourne given the sharp rise in private sector debt and house prices, following the continued building up of economic balances in the country. Other notable downgrades were the numerous rating actions on the seen on Noble Group by all three global rating agencies, losing its IG status and plunging further into junk territory, mainly premised on its expected weak cash flow generation and heightened refinancing risks. The intense competition in the Indian telco industry saw Reliance Communications (RCOM)’s EBITDA contracting 29%, stretching its debt/EBITDA to 8.5x as at Mar-17, prompting a downgrade by Moody’s to Caa1 from B2. Elsewhere, KWG Property and Yuexiu Property were downgraded to B+ and BB+ due to rising land purchases and higher leverage profile.

¨   On the other hand, S&P upgraded the ratings of Indonesian SOE (i.e. Pertamina, Indosat, Astra International, Perusahaan Gas Negara, and Perusahaan Listrik Negara) following a similar rating action on the Indonesian sovereign. Qantas, Indosat, Goodman Group, and CLP Holdings were upgraded on the expectations of an improved credit metrics and operational profile. Lastly, China Evergrande was rewarded with a rating upgrade by S&P due to improved liquidity and property sales performance (from higher margin projects).

Outlook

¨   The previous month has seen the continued good performance of EM Asia assets. The coming month is fraught with market and geopolitical concerns which may risk to unwind the good performance of the EM Asia currencies and bond markets. From the market front, the upcoming June Fed FOMC hike has already been priced in by market participants but the rally in the longer end of the USTs have continued. The planned shrinking of the Fed’s QE balance sheet, and the tempering of the Fed’s rate hiking appetite after this meeting could shift investor appetites drastically. The same for the plans of the ECB in reducing its QE program ahead of December 2017. Geopolitical concerns will be centred on the UK choosing the government who will spearhead its Brexit negotiations and the resolution of political tensions between Qatar and its Middle Eastern neighbours. The US continues to concentrate attention as the market awaits the resolution of the controversy in the US President’s firing of his FBI Director, the investigation into his administration’s ties with a foreign entity, and further insight into his budget, tax cut and spending plans for the US in the month of June. Though many of these risk factors are expected to be resolved by the end of June, this should not be supportive of most asset classes in EM Asia.

Table 1: Index Movements

Indices	31-May	Changes (bps)
		1M	3M	YTD
iTraxx AxJ 5y IG	90.7	-3	-4	-25
AxJ IG Spread (bps)	175.4	0	5	-11
AxJ HY (%)	6.59	16	14	-15
UST 2y	1.28	2	3	9
UST 5y	1.75	-6	-17	-18
UST 10y	2.20	-8	-18	-24
SOR 2y (%)	1.33	-10	-21	-43
SOR 5y (%)	1.81	-12	-13	-58
SOR 10y (%)	2.27	-11	-24	-63
MGS 3y (%)	3.29	8	-24	-27
MGS 5y (%)	3.63	-8	-24	-9
MGS 7y (%)	3.83	-8	-20	-31
MGS 10y (%)	3.87	-18	-26	-35
AAA 5y Spread* (bps)	66	6	20	-3
AAA 10y Spread* (bps)	76	13	22	27
AA 5y Spread* (bps)	103	8	22	-3
AA 10y Spread* (bps)	111	18	19	18

Source: Bloomberg, BNM, RHBFIC        *MYR-denominated bonds

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